Social Commerce: Do you want to do business with your friends?

I’ve recently talked with a few people about ‘social commerce‘—the idea that our online business activities will both reflect and in part be driven by our personal social network. My coauthor Scott Allen recently did a market research study on “Transactional Trust in Social Commerce”, which provides some context on this.

For example, many people would prefer to buy a used car from a friend or a friend of a friend, rather than a stranger. The social context is particularly important, in my experience, when purchasing services as opposed to products. Why? Because the quality of a service varies wildly depending on the motivation and context of the service-provider.

For example, my wife and I are currently evaluating some contractors to do some renovation for us, and a contractor who lives near us and knows some of our friends socially is less likely to rip us off than someone who is a stranger.

Amazon has a primitive version of this functionality, in that I can see that people who like book A also like book B. I’ve also seen quite a few startups who are working on various variations of, ‘What is an efficient way to buy stuff from friends as opposed to strangers?” See for example www.stylehive.com and www.thisnext.com. This was supposed to be a significant part of Tribe‘s business model, and some of the local services directories (e.g., Yelp, LinkedIn) are also trying to leverage the fact that you trust your friends’ (or friends of friends of friends) recommendations.

I see several advantages of socializing commerce, in general:
1. Higher likelihood of truth in advertising. The friend is less likely to lie about how lemony the used car is, because he knows that interacting with you is a repeated game, not a one-time game.
2. Reduced purchase cost because of fewer intermediaries. By buying a car from a friend, you don’t have to pay a dealer’s markup.
3. Reduced costs of identifying the right product. Friends (or friends of friends) tend to have similar tastes. If my friend is (like me) a city dad with a child, then my friend is also likely to have a car to sell me that suits the needs of me and my family.
4. Helping out your friends/your community. No one does a business transaction unless he/she derives some benefit. You’d rather that your friend gets the economic benefit of selling a car than a stranger.

So does it make sense to use online networks to make commerce more social? To evaluate against the criteria I listed:

1. Higher likelihood of truth in advertising. Possibly also true online. However, online we already have measures of reputation that are not dependent on me knowing someone who knows the person in question: eBay’s reputation functionality, Rapleaf, etc.
2. Reduced purchase cost. I think in most cases this doesn’t apply online, and in fact the purchase cost when buying via a social network can be higher because I lose the advantage of a broad seller base competing with one another. In addition, somehow the intermediary (e.g., Amazon, eBay) has to make a markup. If I’m buying something online anyway, then I’ve got access to a shopping comparison engine which will lower my purchase cost to the bare minimum.
3. Reduced costs of identifying the right product. This is likely true, but only for a small number of products. For many products, my friends are not necessarily more knowledgeable about the product category than Cnet.com—so I should really just buy what Cnet recommends, not what my friends are buying. The one advantage of buying what my friends recommend is that, if conforming is my goal, this helps me to conform. If everyone else pays a premium for an iPod or Treo 650 then clearly I must buy one too.
4. Helping out your friends/your community. To some extent this is also true online. However, I doubt it’s a big motivation for many people.

Research from the likes of Forrester, Resource Interactive and Morgan Stanley is also beginning to focus on a new generation of consumers they term the Millennials (aka, “Generation Y”) who range in age from 18-26 years old. Their buying patterns differ from prior generations. The Millennials exceed the Boomers in size, distrust media and have little to no affinity for brands. As opposed to earlier generations, they value their peers’ advice and validation: therefore, CNet recommendations are less valuable. Jeff Leventhal, CEO of Spinback, observed, “this generation is the largest consumer group to date and will shift the commerce paradigm.”

It’s clear that many people like doing business with others in their community, or with others to whom they’re interconnected. Think how many offices have an internal email list for people to sell sporting tickets, TVs, etc. Think of the bulletin boards with things for sale that you’ll see in many churches or synagogues.

However, if you are already doing commerce online as opposed to face-to-face, I’d argue that in many cases it’s irrational to make your commerce decisions dependent on your social ties. In most cases it’s more rational to just buy things via a comparison shopping engine (Shopzilla, Froogle, etc.), particularly when buying a commodity good that could otherwise be found in a few block radius.

The good news for the startups trying to do something in this area: first, many people are irrational and will prefer to buy via a social intermediary, even if they get a worse deal. And second, for certain types of purchases buying via a social intermediary can be more rational, especially when the item is a not a common good, but rather a unique or collectible item. Used cars are the most obvious example, because there are so many ways in which the seller can deceive you about the true value of the product. If you’re a Pez dispenser collector, fellow members of your community can also turn you on to an impulse purchase which you would not have searched for yourself on Shopzilla, but which you are excited to buy because a trusted peer refers you to it.

Feedback welcome.